Asia's financial crisis is becoming the most significant event of the post-cold-war era. The economic growth that has taken Asian countries three decades to achieve has largely derailed in the past six months.
Asian leaders must understand there will be no secure recovery until there is political reform. Asians are confronting the difficult stage of economic development, where the uncertainties of political pluralism have to replace the limited certainties of authoritarianism.
Thailand has eased social tensions caused by the financial crisis through a change in government viewed by the Thai populace to be more transparent and accountable. The government under Prime Minister Chuan Leekpai is fully committed to political reform under Thailand's recently promulgated constitution, the most democratic in the nation's history.
Indonesia's political system isn't as flexible. President Suharto, in office for 30 years, hasn't allowed a succession process to develop that could precipitate a transition in government. Because of this, and because of his longevity, Suharto is the only person at this time who can enforce the tough fiscal reforms the International Monetary Fund requires.
The IMF packages for Thailand and Indonesia require cuts in government spending, high interest rates to defend their currencies, and tax hikes to curb consumption and raise government revenues. The IMF backtracked on an earlier demand for Indonesia to come up with a budget surplus equivalent to 1 percent of the country's GDP and now expects a 1 percent deficit.
The IMF has not shown any intention of backtracking on a similar demand for Thailand. A number of economists worry that if the financial crisis worsens, the conditions set in the bailout packages risk triggering a full-blown recession in Southeast Asia.
Is the IMF prescribing the right remedy for what ails the Thai and Indonesian economies? Since signing their respective agreements with the IMF, the Thai baht and Indonesian rupiah rapidly lost more than half their value.
And this is making it far more costly for Thai and Indonesian companies to repay crushing debts. All but 22 of the 282 companies listed in the Jakarta Stock Exchange are reckoned to be technically bankrupt. Consequently, 1 million Thais are expected to lose their jobs in 1998 and millions more in Indonesia. How Thailand and Indonesia deal with the severe social consequences caused by massive layoffs may be their governments' greatest challenge.
While changes to the IMF's conditions should be carefully considered, such change should not undermine the credibility of the whole program. The Chuan government has permanently shut down 56 insolvent finance companies, placed a strict timetable on solvent banks to recapitalize, opened the banking industry to foreign investment, and cut government spending by 20 percent, with more cuts to follow.
The IMF assumed the crisis would be confined to Thailand and that the baht would stabilize at a rate of about 32 to the dollar; it now is trading at 55 to the dollar. This huge difference makes it far more expensive for Thais to pay their $92 billion foreign debt.
In Indonesia, the budget released Jan. 6 blatantly defied IMF conditions that the government had previously agreed to. On Jan. 15, after a turbulent week that saw the rupiah plunge to more than 10,000 to the dollar and the panic-buying of food, Suharto signed a letter of intent with the IMF, committing to reforms that will eliminate subsidies, break up monopolies, and delay or cancel major infrastructure projects - many owned and operated by Suharto's family and friends.
The IMF efforts are steps in the right direction, but they don't address the issue of loan defaults by Indonesian companies. Banks can do little but work out better repayment terms because Indonesia's bankruptcy laws make it difficult for creditors to seize assets. Consequently, mounting debt will make it hard for the private sector to secure liquidity, which could further undermine the value of the rupiah.
The IMF thus finds itself in a precarious position. Relaxing conditions gives implicit approval to Indonesia's lack of commitment to policy reform. But failure to relax conditions could increase the risk of the nation going bankrupt. The IMF's test will be how to keep Indonesia out of bankruptcy while getting the government to take more strident measures toward adopting reforms.
Reform in Thailand and Indonesia will require strong, stable institutions that are transparent, accountable, and predicated on the rule of law. For a country to prosper in the post-industrial information age, it must become more open and democratic, where citizens have a voice on how their leaders should govern. And policies must enable the average citizen to have the chance to earn a slice of the country's economic pie. Thais and Indonesians are demanding no less; their governments must be responsive.
* John J. Brandon is a Southeast Asia specialist for The Asia Foundation. The views expressed here are his own.